Thursday, February 28, 2013

Monkey business



A few years ago it was suggested that monkeys can beat professional asset managers at picking stocks to invest in. Even though the result of the experiment conducted by the WSJ in 1988 was not conclusive, the idea disturbed the investment community a little.

But it seems some professional asset managers had found a creative way to take advantage of the random portfolio selection effect. If monkeys can - at least sometimes - beat professional at the game, why not to increase our chances by multiplying strategies / funds and boast success... in some of the funds under management!

There are usually two ways to make money in the asset management business: one can either take a share of the profits generated by the fund, or charge some annual management fee. Both of these fees have an asymmetric structure, beneficial to the manager - in the first case he gains when the fund increases in value, while he does not lose any serious money when the value of the fund collapses. The second fee is connected only with size of the fund / assets under management and not - at least directly - with its performance / value.

Hence, in many cases it is enough to amass a large enough asset pool and charge the fund participants / investors irrespective of fund results.

In order to draw investors you need  two things: some limited track record or apparently convincing investment story, and an extensive sales network. With that, you are ready to show your true investment incompetence without worrying about your income... :(

Since many fund managers have problems beating the market and sometimes can make terrible mistake, what is the difference between average fund manager and the monkey then? Monkeys seems fair.


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